Economics Text Book Chapter Summaries free essay sample

The following chapter summaries are mostly based on the McConnell Brue text â€Å"Economics- 16th Ed. † Details available at http://highered. mcgraw-hill. com/sites/0072819359/information_center_view0/ note .. arrow means â€Å"leads to,† â€Å"results in,† â€Å"causes† Chapter 1 – The Nature and Method of Economics Economics is the study of scarcity and choice Key concept- opportunity cost: for a person to get more of one thing he/she must forego getting something else e. g. to get food must pay (give up) money In economics rational behavior is assumed, e. g. people want more goods for less money Assumption: we all want to increase utility = happiness, satisfaction Rational self-interest not same as selfishness, e. g. one reason for donating to charity is because of derived satisfaction Key concept- marginal analysis- comparisons of marginal benefits and marginal costs, e. g. : keep eating until full, that is until marginal benefit = marginal cost i. e. not worth it to pay for more food when already full Why study economics? As John Maynard Keynes said â€Å"indeed, the world is ruled by little else. † Most practical ideology is found in economics Economics for citizenship- intelligent participation in a democracy requires a knowledge of fundamental economics However, from the 2004 â€Å"A Fifty College Study† by the American Council of Trustees and Alumni: â€Å"One of this study’s most extraordinary findings was that not one college or university among those studied requires a general course in economics† http://liberalorder. typepad. com/the_liberal_order/files/HollowCoreWeb. pdf Understanding of concept of marginal benefits / marginal costs are required for business management Ultimately economics is a social science seeking society’s overall fullest advantages and best interests Article 1. 1 – â€Å"The Opportunity Cost of Economics Education† – see end of this chapter Figure 1. 1 – Economic Methodology Figure 1. 1 economics methodology Scientific method: observe real-world activity, then formulate hypothesis statement, e. g. â€Å"seems A happens because of B,† then test hypothesis by gathering facts, then modify and strengthen hypothesis to become a theory Theoretical economics- the process of deriving economic theories and principles from observation Role of economic theorizing is to arrange facts, interpret them, and generalize from them Economic theories and principles- are statements about behavior of the economy that enable prediction of the probable effects of certain actions Principle (also called â€Å"law†) a strong, established theory, Model made from a combination of theories and/or principles, often graphic in form Generalizations economic theories, principles and models are generalizations, e. g. hen personal income goes up people tend to consume more, but some individuals will not Other-things-equal assumption often used e. g. : when price of product A goes down .. people will buy more of A, assuming quality of A has not also gone down Abstractions simplifications that omit irrelevant facts Policy economics economic theory and data .. formulation of government policies and courses of action .. solve economic problems and achieve economic goals Economic policy is most often applied by governments after problems arise, but with economic analysis we can predict problems and apply policy in advance, e. g. : Federal Reserve Bank (central bank of the U. S. ) anticipation of recession .. reduce interest rates .. increase business investment .. avoid recession Note throughout this summary the terms â€Å"firms† and â€Å"businesses† have the same meaning private (as opposed to government) profit-seeking organizations The four steps of economic policy: 1- statement of goal, e. g. maintain full employment 2- determine policy options, e. g. lower taxes or raise amount of government spending 3- implement the policy 4- evaluate the result and effectiveness the implemented policy Some of the economic issues and goals government policymakers must consider: conomic growth full employment increase personal income higher living standards price-level stability, i. e. avoid inflation economic freedom and efficiency through minimization of regulations taxation and government spending equitable income and wealth redistribution reduction of poverty economic security, e. g. social security p ayments for retirees expansion of free trade with other countries Economic goals often involve tradeoffs e. g. : redistribution of income/wealth transfers to the poor †¢ increased taxation of the rich †¢ reduced opportunities for the rich to invest including starting new businesses, and educed incentives for the poor to retrain, relocate, work hard †¢ slowed economic growth, slowed job growth The two main categories of economics study: macroeconomics and microeconomics Macroeconomics examines the economy as a whole and its main sectors: government sector, household sector, business sector An â€Å"aggregate† is a collection of specific economic units treated as one unit, e. g. the millions of consumers lumped together and called â€Å"consumers† Macroeconomics seeks to obtain an overview or outline of the economy, i. e. examines the beach, not the grains of sand Microeconomics examines details of specific economic units uch as one household (typically a nuclear family), company, or unit of government i. e. examines the sand grains not the beach Positive and normative economics Positive economics focuses on facts and cause-and-effect relationships includes theory development and testing avoids right-wrong value judgments central question- â€Å"what is? † example positive economic statement- â€Å"unemployment is high† Normative economics involve value judgments such as what the economy should be like what goals are desirable and what policy actions can achieve those goals central question- â€Å"what ought to be? † xample normative economic statement- â€Å"better to have overall lower standards of living than a high unemployment rate† most disagreements among economists are regarding normative economics, e. g. : economists agree on the principle of supply-demand curves, but do not agree on what is the best level of taxation Pitfalls to sound reasoning Discussions about economics can become personal and emotional, but one must think objectively and accurately, must avoid non-logical thinking Biases cloud thinking and interfere with objective analysis, must avoid preconceptions e. g. â€Å"large corporations are evil† Loaded terminology, must avoid language such as â€Å"all taxes are bad† Definitions and terms used in economics sometimes differ from common usage, e. g. â€Å"investment† used by economists strictly means purchase of new capital assets used for production/ output such as machinery Fallacy of composition assumption that what is true for one individual is necessarily true for a group e. g. if you stand you will get a better view, but if everyone stands the view for everyone is not improved e. g. if one farmer’s crop is larger than normal he will get sharply higher income, but ot if all farmers’ crops are larger- because prices will be down due to increased supply Causation fallacies mistakes in identifying which is cause and which is effect Post ad hoc fallacy (also called â€Å"after this, therefore because of this† fallacy) just because event A precedes event B, A does not necessarily .. B e. g. rain dance does not .. rain Correlation versus ca usation fallacy correlation between event X and event Y does not mean one causes the other, perhaps they are both caused by event Z e. g. rising river X does not .. greener grass Y, rather recent rain Z causes both e. . country A does not get richer because country B is getting richer, but rather because both have increased trade with country C End of chapter 1, next The Economizing Problem Go to the following link for background information for concepts in this chapter: http://highered. mcgraw-hill. com/sites/0072819359/student_view0/chapter1/origin_of_the_idea. html Article 1. 1 – â€Å"The Opportunity Cost of Economics Education† The following is a selection from the article: The Opportunity Cost of Economics Education By ROBERT H. FRANK The New York Times September 1, 2005 SHORTLY after I began teaching, more than 30 years ago, three friends in different cities independently sent me the same New Yorker cartoon depicting a woman introducing a man to a friend at a party. Mary, Id like you to meet Marty Thorndecker, she began. Hes an economist, but hes really very nice. Cartoons are data. That people find them amusing usually tells us something about reality. Curious about what drove responses to the economist cartoon, I began asking about the disappointed looks that appeared on peoples faces when they first discovered I was an economist. Invariably they mentioned unpleasant memories of an introductory economics course. There were all those incomprehensible graphs, was a common refrain. Needless to say, a course can be valuable even if unpleasant. Unfortunately, however, most students seem to emerge from introductory economics courses without having learned even the most important basic principles. According to one recent study, their ability to answer simple economic questions several months after leaving the course is not measurably different from that of people who never took a principles course. What explains such abysmal performance? One problem is the encyclopedic range typical of introductory courses. As the Nobel laureate George J. Stigler wrote more than 40 years ago, The brief exposure to each of a vast array of techniques and problems leaves the student no basic economic logic with which to analyze the economic questions he will face as a citizen. Another problem is that the introductory course is increasingly tailored not for the majority of students for whom it will be their only economics course, but for the negligible fraction who will go on to become professional economists. Such courses focus on the mathematical models that have become the cornerstone of modern economic theory. These models prove daunting for many students and leave them little time and energy to focus on how basic economic principles help explain everyday behavior. But there is an even more troubling explanation for students failure to learn fundamental economic concepts. It is that many of their professors may have only a tenuous grasp of these concepts, since they, too, took encyclopedic introductory courses, followed by advanced courses that were even more technical. Consider, for example, the cost-benefit principle, which says that an action should be taken only if its benefit is at least as great as its cost. Although this principle sounds disarmingly simple, many people fail to apply it correctly because they do not understand what constitutes a relevant cost. For instance, the true economic cost of attending a concert its opportunity cost includes not just the explicit cost of the ticket but also the implicit value of other opportunities that must be forgone to attend the concert http://www. ssc. wisc. edu/~gwallace/ECON_101/Resources/NYT_09_01_05. pdf Chapter 2 The Economizing Problem Fundamental elements of economics are scarcity, choices, and costs Economizing problem- wants are unlimited and insatiable, but resources are limited Objective of all economic activity is to fulfill needs and wants Economic goals: individuals- obtain goods and services for needs, satisfaction, pleasure, and fulfillment businesses- growth and profit governments- provide stable and prosperous economic environment Two categories of goods/services: Consumer goods- that directly satisfy consumer needs/wants Capital goods (or simply â€Å"capital†) equipment, machinery, tools, supplies used to create other goods Economic resources- all natural, human and manufactured resources used for production of goods and services Two types of economic resources: 1- property resources – land, raw materials, capital 2- human resources – labor and entrepreneurial ability Note that ecomomists estimate labor costs are about 75% of all costs for U. S. firms Resource categories as follows are collectively called â€Å"the factors of production† 1a- land- including all natural resources, such as water, minerals 1b- capital- equipment, machinery, tools used to create goods and services n economics the term â€Å"investment† means the acquisition of capital goods (in finance it means buying any asset) 2a- labor- physical and mental talents of individuals used in producing goods and services 2b- entrepreneurial ability- owners/managers activities, featuring: risking personal wealth innovating, inventing, setting goals, motivating bringing the other resources (1a, 1b, 2a above) together and managing them making main, strategic business decisions Resource income types income to entrepreneurs is called â€Å"profits† income to those who supply labor is called â€Å"wages† ncome to owners of property and assets is called â€Å"rent† and â€Å"interest† The four factors of production (1a, 1b, 2a, and 2b above) are limited in quantity, therefore productive output and wealth generation is limited labor unemployment results when labor is plentiful relative to the other three factors in year 2002 U. S. output was $36,000 per person; in the poorest nations it was as low as $300 Economics is concerned with efficient use of resources, getting the most from the available four factors of production .. maximizing business output/profits, and consumer satisfaction Full employment- current full use of all available 1a, 1b, 2a, and 2b resources Full production- efficient current use of all available 1a, 1b, 2a, and 2b resources to achieve maximum possible output Therefore, without efficiency it is possible to have full employment, but not full production Two types of efficiency- productive efficiency and allocative efficiency Productive efficiency- least costly production of any mix of goods and services if have only $100 in resources and can make a radio for $10 then have $90 remaining to make other things but if could make radio more efficiently for $5 ould have $95 remaining to make other things So, productive efficiency is a micro, narrow view of and approach to efficiency – make products efficiently regardless of what consumers want Allocative efficiency- production of the particular mix of goods and services most wanted by society, i. e. mix that maximizes people’s well-being do not have allocative efficiency if make radios f or $5 each, but making more than consumers want allocative efficiency means produce desired mix of goods/services, each item at lowest cost allocative efficiency means apportion limited resources among industries so we obtain the mix of oods/services consumers want So, allocative efficiency is a macro, wide view of and approach to efficiency, produce efficiently and produce what consumers want The production possibilities model (PPM) Because resources are limited, amount of produced goods/ services is limited, therefore choices must be made Four assumptions while creating PPM: 1- full employment and productive efficiency- the four factors of production are fully used and used most efficiently at least cost 2- fixed resources- available supplies of the four factors of production are fixed in quantity and quality 3- fixed level of technology two goods produced and consumed in the model economy The following PPM will show only two goods- pizzas and robots pizzas to represent consumer goods that directly satisfy consumer wants robots to represent capital goods, i. e. equipment and tools needed to make pizzas In this model: limited and fixed resources, and the economy output is at full capacity making two goods, pizzas and robots .. to get more of one good .. must give up some of the other Table 2. 1 Production Possibilities Table, production possibilities of pizzas and robots with full employment and productive efficiency Production Alternatives Type of product A B C D E Pizzas (in hundred thousands) 0 1 2 3 4 Robots (in thousands) 10 9 7 4 0 Production possibilities table 2. 1 above, shows what combinations of products can be made with current resources and at full output; for example at alternative A can make 10,000 robots and no pizzas Figure 2. 1 – Production Possibilities Curve Figure 2. 1 production possibilities curve (PPC) includes table 2. 1 data All possible combinations of maximum production are along the curve For the economy to operate at points on the PPC must have full employment and productive efficiency Inside the line, yellow area, e. . point I, combinations are possible but economy is not achieving maximum possible production, i. e. not achieving full employment and/ or productive efficiency Combinations outside the curve, e. g. point U, are not attainable with current resources and technology Law of increasing opportunity cost- the higher quantity of a product being produced, the greater its opport unity cost Opportunity cost here- amount of one product (e. g. robots) that must be given up to obtain one unit of the other product (e. g. pizzas) For example in figure 2. 1 and table 2. 1 above: On figure 2. when moving from point A to B, looking at table 2. 1 we see opportunity cost of one unit additional pizza is one less unit of robots when moving from point B to C, cost of one additional pizza is two less units of robots when moving from point C to D, cost of one additional pizza is three less units of robots when moving from point D to E cost of one additional pizza is four less units of robots Slope of the curve is bowed, rather than straight, because of increasing opportunity costs Economic rationale for law of increasing opportunity costs- resources cannot be used equally efficiently for any quantity of productive use . g. : once all bricklayers are employed, a carpenter forced into bricklaying will not be as productive as a trained bricklayer e. g. : with a factory of set size and equipment and 100 workers, cannot add more and more workers and continue to get a proportional increase in production for each added worker, and eventually it would be so crowded production would go down The PPC illustrates four concepts: 1- scarcity, shown by the area outside the curve representing unattainable combinations of output 2- choice, can have combinations of goods along the curve opportunity cost, the curve shows if you want more of one product, you must give up some of the other product 4- law of increasing opportunity costs- the concave shape of the curve shows you have to give up more and more of one product to get less and less of the other product Allocative efficiency If we have full employment of human and property economic resources, and Have productive efficiency, i. e. make things in the most efficient way We will be maximizing output, i. e. be on a point on the PPC However, maximum output does not mean we are making the mix of products most desired by society, . g. maybe we are making 4 units of pizzas and no robots, but society wants some robots If we have allocative efficiency it means we are making the desired mix point of robots and pizzas Finding the desired mix point involves comparison of marginal benefits and marginal cost Any economic activity should expanded if marginal benefit is greater than marginal cost, i. e. until: Marginal Benefit = Marginal Cost (MB = MC) Two main MB and MC concepts: 1- the current unit of a good a person consumes yields more satisfaction than the next unit of the same good the current unit of a good a person produces is less costly to produce than the next unit of the same good Figure 2. 2 – Allocative Efficiency: MB = MC Looking at figure 2. 2, we see intersection point MB=MC optimum quantity of pizzas is 2 units of pizzas, or 200,000 pizzas If we are making only 100,000 pizzas, marginal benefit for the next pizza is $15, but marginal cost is only $5, therefore we make more pizzas B y making the next pizza at quantity 1, in effect we are giving up one unit of something else we value at $5 for that next pizza we value at $15, so we ake the trade since $15 $5 This is how the free market sets prices and quantities produced unit price MB customers pay for a product decreases until unit cost MC for producers rise to equal that unit price It can be said all actions in life involve MB and MC decisions E. g. you sit down and play guitar for fun until the MC, the time given up to play guitar when you could be doing something else is no longer worth the MB i. e. eventually you reach the point of satisfaction, where MC = MB and move on to spend your time or other scarce resource on something else Figure 2. – Unemployment, Productive Inefficiency, and the Production Possibilities Curve In figure 2. 3: Any point inside the PPC, e. g. point I, represents unemployment and/or productive inefficiency The arrows indicate that, by achieving full employment and productive efficiency the economy could operate on the PPC, meaning the economy could produce more of one or both products than at point I Over time, a growing free market economy allows two things: 1- increases in resource supplies growing population and better training/ education allows more and better labor and entrepreneurial bilities increasing amount of capital (machinery and tools) discovery and utilization of new natural resources 2- advances in technology, new and better products and new and better ways to make them; more efficient use of natural resources to minimize depletion Figure 2. 4 – Economic Growth and the Production Possibilities Curve Economic growth means more production capacity, the ability to produce a larger total output, e. g. in figure 2. 4 movement of PP curve outward Here is a table showing the information in figure 2. 4: Table 2. 2 Production Possibilities Table, Increased Production Resulting From a Growing Economy Production Alternatives Type of product A B C D E Pizzas (in hundred thousands) 0 2 4 6 8 Robots (in thousands) 14 12 9 5 0 Figure 2. 5 – Economic growth affected by choice of present and future goods, countries Alta and Zorn Viewing figure 2. 5, an economy’s present choice of positions on its production possibilities curve helps determine the curve’s future location Country Alta’s current choice favoring present goods, (pizzas) will cause some outward shift of the curve in the future Country Zorn’s current choice favoring â€Å"future goods,† (robots) as made by Zorn, will result in a greater outward shift of the curve in the future Future goods include capital goods e. g. robots, tools, and education and are ingredients of economic growth Present goods are consumer goods that provide immediate satisfaction such as food e. g. pizza and clothing This is one argument for need of a large â€Å"rich† segment of people in a country, they will invest most of their excess income in future goods (e. g. shares of stock in public corporations), not having to spend it on present goods In this example countries Alta and Zorn at first are the same, except Alta favors present goods and Zorn favors future goods Zorn will achieve greater economic growth, shown by the farther right position of future production possibilities curve Production possibilities curve, interactive graph at: http://highered. mcgraw-hill. com/sites/0072819359/student_view0/chapter2/interactive_graphs. html International trade enriches the local economy, moving the production possibilities curve to the right Specialization and trade enables a country to get more of a desired good â€Å"A† at less sacrifice of other good â€Å"B,† e. . sacrifice 2 units of robots rather than 3 to get an extra unit of pizza Output gains from greater international specialization and trade are the equivalent of economic growth, i. e. pushing to right the PPC Economic systems types There are two general types of economic system- the market system, and the command system All economies have features of bot h, countries must decide where on the market-command spectrum they want to be, most political conflicts result from elements of making this decision, i. e. ow much government involvement in the economy is best The market system (capitalism, free enterprise) Private ownership of factors of production including property Each person seeks to maximize one’s own satisfaction or profit through their own decisions regarding consumption or investment Product and resource allocation and prices are determined through free and open markets Competition between many firms in the marketplace The U. S. is an example of market system: government role in economics is minimized overnment is involved in many ways as providing goods and services not provided by the private sector such as monetary and judicial systems, and pre-college schooling some redistribution of income, such as welfare and social security transfer payments Extreme case is laissez-faire, government role limited to law enforce ment including protecting private property, and maintaining optimum environment for operation of market system; e. g. schools not provided by government; the U. S. was close to this prior to the Great Depression of the 1930s The command system (socialism, government control) Government ownership and control of most factors of production and most property Government decides what is satisfactory, and how satisfaction can be gained Government allocates goods and production factors, and sets prices Government controls marketplace with many regulations and restrictions Government owns most large industries including oil and steel Extreme case is communism, the state owns and controls everything including all housing North Korea and Cuba are examples of command system, almost total government role in economics; some small street vendor businesses are allowed Figure 2. 6 – The Circular Flow Model Figure 2. 6 circular flow model shows how a market system works, Red counterclockwise arrows show â€Å"real flow† of resources and finished goods and inputs Black clockwise arrows show â€Å"money flow† of income and consumption A market economy has two main groups of decision makers- households and businesses (government will be added in a more detailed model in chapter 5) Public = households + businesses (but not including government) A market economy has two markets, resource market and product market Resource market This is where productive resources needed by businesses are bought and sold Viewing the top red counter-clockwise arrows, households sell their resource inputs labor, land, capital, entrepreneurial ability via the resource market to businesses needed to create products Viewing the top black clockwise arrows, businesses then pay for those resources Product market This is where goods and services produced by businesses are bought and sold Viewing the bottom red counter-clockwise arrows, businesses sell their products to households Viewing the bottom black clockwise arrows, households pay for the products End of Chapter 2, chapter -Individual Markets, Demand and Supply Go to the following link for background information for concepts in this chapter: http://highered. mcgraw-hill. com/sites/0072819359/student_view0/chapter2/origin_of_the_idea. html Chapter 3 – Individual Markets: Demand and Supply Market – institution or mechanism that brings together buyers (â€Å"demanders†) and sellers (â€Å"suppliers†) of goods, services and resources Market examples- local retail store, websites such as Amazon and EBay, New York Stock Exchange, newspaper containing a want ad for a company desiring to hire a new employee Demand schedule – table or curve showing amounts of a product consumers are willing and able to buy at various prices during a given time period Table 3. 1 – An individual buyer’s demand schedule for corn Price per bushel Bushels demanded per week $5 10 4 20 3 35 2 55 1 80 Table 3. 1 is a hypothetical demand schedule for a single consumer purchasing bushels of corn As expected, the lower the price, the more quantity is demanded â€Å"Willing and able† is key, must want to buy and be able to buy, in this case at price $5 the buyer is willing and able to buy 10 bushels per week Time period also key, stating a buyer will buy 10 bushels at $5 has no meaning because it could be over a lifetime; assumption of a limited time period is made when no time period is specified Law of demand- all else equal, as price falls the quantity demanded rises, and as price rises the quantity demanded falls â€Å"All else equal† is key, e. g. buyers’ perception of quality stays the same as price goes up For example in the 1980s Gibson raised the prices of their guitars, buyers perceived better quality and bought a higher number of Gibson guitars, although actual quality did not improve proportionally Why the inverse relationship between price and quantity demanded? common sense, people naturally buy higher quantities when prices are lower diminishing marginal utility in any time period a buyer of a product will derive less satisfaction (benefit, utility) from each successive unit of the product bought/ consumed income effect- lower prices increase purchasing power of consumer, i. e. when a person buys at a lower price more income remains enabling person to make more purchases substitution effect- when product A (corn) price falls and similar product B (soybeans) stays same, buyers substitute product A for product B, e. . consume more corn products and less soybean products Figure 3. 1 – An Individual Buyer’s Demand Curve For Corn Demand curve (D) -curve on a graph showing quantities demanded at various prices Figure 3. 1 demand curve is a graph of the relationship between price and quantity demanded, this plots the information in table 3. 1 The above example as sumes one buyer for corn, but in a competitive market there is more than one buyer By adding up quantities demanded by all buyers we move from individual demand to market demand Table 3. 2 – Market demand for corn, three buyers Quantity demanded, bushels, per buyer Total bushels Price per First Second Third demanded bushel buyer buyer buyer per week $5 10+ 12 +8= 30 4 20 + 23 +17 = 60 3 35 + 39 +26 = 100 2 55 + 60 +39 = 154 1 80 + 87 +54 = 221 Table 3. 2 shows an example of three buyers, with their resulting totals demanded Figure 3. 2 – Market Demand For Corn, Three Buyers Figure 3. 2 shows the resulting move to the right of the demand curve from D1 to D2 when market demand of three buyers is totaled You can visualize the D2 curve as continuing downward and to the right for quantities at prices $2 and $1 A demand curve can be a representation of an entire market with thousands or more buyers, the quantities of corn are multiplied, but the downward slope of the demand curve is similar reflecting higher quantities demanded at lower prices Determinants of demand- factors other than price affecting purchase quantity, including: Consumers’ tastes- if one loses interest in guitars, will not buy more if guitar prices go down Number of buyers in market, e. g. trade agreements have reduced foreign trade barriers resulting in more buyers overseas and higher sales of U. S. farm products there Income- rising income results in more purchases of â€Å"normal goods† (but not for â€Å"inferior goods† e. g. used clothing) Prices of related goods: if price of a substitute good goes down, such as soybean products, consumers buy less corn products if a price of a complementary good such as gasoline goes up consumers buy less motor oil, because they are driving their cars less Future expectations- people bought more gasoline ahead of Y2K (January 1, 2000) because they were worried about possible disruptions of supply of gasoline Change in demand results if any of the determinants of demand change (conditions other than price) The demand curve will move left for any decrease in demand (less quantity demanded at all prices) The demand curve will move right for any increase in demand (more quantity demanded at all prices) For example, if number of buyers (a condition other than price) increase the demand curve will shift right When drawing a demand curve, since only quantity and price is shown, the determinants of demand are assumed to remain constant for the time period In figure 3. , the demand curve shifts right from D1 to D2 because of increased number of buyers, even though price remains the same, this is a change in demand Change in quantity demanded is a movement along a current demand curve This is a straightforward change in quantity demanded because of change of price In figure 3. 2 this is shown by movement along D1 curve from one red dot to another Supply schedule table or curve showing amounts of a product suppliers are willing and able to supply at various prices during a given time period Table 3. 3 – An individual supplier’s supply of corn Quantity Price per Supplied bushel per week $5 60 4 50 3 35 2 20 1 5 Law of supply-all else equal, as price rises the quantity supplied rises, and as price falls the quantity demanded falls Prices serve as an incentive for a supplier, the higher the price the more of a product is made Amount supplied depends on cost of production, if revenue from additional products made will be more than costs of making those additional products, a company will supply more of those products Supply amount increases until: marginal cost = marginal benefit or ost of one more item = benefit gained from one more item E. g. if it costs $70 a barrel to pump out oil from an old deep well in Texas, the oil company will not pump it out until demand has driven the price of a barrel over $70 Figure 3. 3 – Supply Curve, Individual Supplier’s Supply of Corn Supply curve (S) -curve on a graph showing quantities supplied at various prices Figure 3. 3 shows one supplier’s supply curve, to get the full market supply curve all the individual suppliers’ curves would be added together, similar to demand table 3. 2 and figure 3. above Figure 3. 4 – Change In a Determinant of Supply Means a Change In Quantity Supplied Determinants of supply- factors other than price that affect quantity supplied of a product, including: Resource prices- e. g. decreased cost of supplies used for production .. more of a product will be offered to the market E. g. in figure 3. 4, assume a beginning market selling price of $3 and quantity demanded of 35 bushels, then: sudden decrease of fertilizer costs occur .. production cost per bushel decreases .. quantity supplied at price $3 increases from 35 to 60 Technology- as technology advances, costs of production go down and higher quantities are produced, e. g. modern farmers using tractors produce more than previous farmers growing by hand Taxes and subsidies- these raise or reduce supplier costs, shifting the supply curve left or right Prices of other goods- â€Å"substitution of production† can occur when a supplier can make more than one product e. g. if price of soybeans is higher than corn, a farmer will supply soybeans, resulting in a left shift of supply curve for corn Price expectations- farmers anticipating a higher wheat price in the future ight withhold some of their current wheat harvest from the market, causing a decrease in the current supply of wheat (shift to left of supply curve) Number of sellers- as more suppliers enter the market the farther to the right the supply curve shifts Change in supply results if any conditions change other than price, as we can see from the above Supply change caused by change of de terminants of supply, causing a shift to a new supply curve e. g. from S to S1 in figure 3. 4 The supply curve will move left for any decrease in supply The supply curve will move right for any increase in supply When drawing a supply curve, since only quantity and price is shown, the determinants of supply are assumed to remain constant for the time period Change in quantity supplied is a movement along a current supply curve This is a straightforward change in quantity supplied because of change of price In figure 3. 3 this is shown by movement along S curve from one red dot to another Supply and Demand – Market Equilibrium We can now bring supply and demand curves together to find the point where market price and quantity is determined Figure 3. 5 – Market supply of and demand for corn Figure 3. 5 above combines the previous demand and supply tables for corn, demand on left and supply on right Surplus- is excess supply, shown on right side in blue print above the 7,000 quantity E. g. at price of $4 per bushel farmers are willing to supply 10,000 bushels, but at that price buyers are only willing to buy 4,000 bushels, the resulting surplus production of corn is 6,000 bushels This could happen if the government set an artificially high price of $4 rather than letting the market decide price, which would be $3 Shortage- is too little supply, shown in blue below the 7,000 quantity E. g. at price of $2 a bushel farmers are willing to supply 4,000 bushels, but at that price buyers want to buy 11,000 bushels; again this could happen if the government set an artificially low price of $2 Equilibrium price- price where there is no excess supply nor excess demand, also called â€Å"market clearing price;† in the table 3. 5 example this is $3 Equilibrium quantity- results from equilibrium price, no fewer nor more quantities are demanded nor supplied in the market In summary: At a too high price suppliers want to sell more than consumers want to buy resulting in surplus At a too low price consumers want to buy more than suppliers want to sell resulting in shortage Figure 3. 6 – Equilibrium Price and Quantity Above demand and supply curves are combined in figure 3. 6 Point E1 is market-clearing equilibrium point E. g. distance between points A and B shows the surplus of 6000 bushels if price is set by government at $4 Supply and demand, interactive graph at: http://highered. mcgraw-hill. com/sites/0072819359/student_view0/chapter3/interactive_graphs. tml Rationing function of prices- ability of competing forces of supply and demand to establish a price at which selling and buying decisions clear the market Any change in determinants of supply or determinants of demand would move either S or D curve left or right resulting in a new supply-demand equilibrium point E. g. in figure 3. 6 an increase in quantity demanded, caused by increased number of buy ers determinant, would shift the demand curve to the right, e. g. intersecting the supply curve at point B What would the new equilibrium quantity supplied and price be? 10,000 bushels and $4 However, if there is a subsequent increase in quantity supplied, e. g. caused by increased number of suppliers determinant, the supply curve would shift to the right, e. g. causing intersection at point E2 What would the quantity supplied and price be? 14,000 bushels and $3 In a free market a product’s price tends to stabilize or even go down when its supply determinants are not scarce E. g. abundant cheap overseas labor †¢ S curve shift to right †¢ decrease in price of DVD players espite growing demand for DVD players, which moves D curve to right but more slowly A product’s price tends go up when its supply determinants are scarce, such as the increasing price of gasoline because of dwindling/ controlled supply of crude oil Figure 3. 7 – Price Ceiling Results I n Shortage Price ceiling-maximum legal price a seller may charge for a good or service Government-set price ceiling resulting in shortage example is shown in figure 3. 7 Substituting gasoline for corn if the US government mandated a gasoline pump price of $2 a gallon .. 11 units would be demanded but only 4 units would be supplied to the market (e. . only easiest-to-pump-lowest-cost Saudi oil) .. shortage of 7 units, and †¢ long lines at gas stations, and lack of incentives to conserve energy and develop new sources of energy†¢ Another result of government-set low price ceiling would be development of a black market some people would wait in line for many hours and then buy as much gasoline as they could, then. turn around and sell it at a price higher than $2 to those who don’t want to wait in line One real-world example of government-set low price ceiling is the rent price controls for apartments in New York City: the lower-than-market set rent prices †¢ ong wait lists for those wanting to rent, and lack of interest in renting by building owners, building owners thinking â€Å"why rent apartments when I can convert the units to condos and sell at higher market prices? †) Figure 3. 8 – Price Floor Resulting In Unemployment Price floor- a minimum price fixed by the government, often used when society feels the free market system does not provide a sufficient income for a certain group of resource suppliers An example is minimum wage laws Looking at figure 3. 8: if the government mandates artificially high minimum wage price (floor) of $4 upply of unskilled labor becomes point B 10 units but demand for unskilled labor is only point A 4 units with resulting unemployment of 7 – 4 = 3 units Note overall unskilled laborers are better off at wage of $3: $3 x 7 = $21 total income, but $4 x 4 = $16 total income Artificially high minimum wage price floor results fewer unskilled laborers employed smaller companies that cannot b ear the artificially high costs go out of business cost/ price of products increase companies decide to manufacture overseas rather than in the U. S. Note the use of the term â€Å"artificially high† here; if the market price for unskilled labor is $3. 0 and a law is passed mandating a minimum wage of $3. 00, there will be no unemployment caused Article 3. 1 – â€Å"Why the minimum wage doesnt matter† – see end of this chapter Price ceilings and price floors, interactive graph at: http://highered. mcgraw-hill. com/sites/0072819359/student_view0/chapter3/interactive_graphs. html End of chapter 3, next : Chapter 3w – Applications and Extensions of Supply and Demand Analysis Article 3. 1 – â€Å"Why the minimum wage doesnt matter† Why the minimum wage doesnt matter The once-reliable bugbear has lost much of its political bite. And there are better ways to help the working poor. By Elaine S. Povich, FSB Magazine August 21 2006: 9:53 AM EDT WASHINGTON, D. C. (FSB Magazine) If you were looking for an opponent of minimum-wage increases, you might turn to someone such as Mazyar Rahimzadeh, 25. Hes got a half-million dollars in debt hanging over him, employs 35 workers, and just opened his second restaurant, Bijan, in Walnut Creek, Calif. Yet when hes asked about the California legislatures proposed bill to raise the states minimum wage by 50 cents an hour, he just shrugs. It wouldnt make that much of a difference, he says, pointing out that he already pays his workers more than the states current minimum of $6. 5 an hour. This election season, the minimum wage has once again become a political rallying point. The Chicago City Councils recent decision to require big-box retailers to pay all employees at least $10 an hour, plus $3 an hour in benefits, is just the beginning. Democrats in Congress are renewing their efforts to raise the federal minimum wage stuck at $5. 15 sin ce 1997 as a way to paint themselves as the party of the little guy. Most Republicans, while wary of polls that show public support for a higher wage, oppose it on free-market grounds, especially when addressing small- business audiences. The Republican-controlled House approved a minimum-wage hike only after it was attached to a cut in the estate tax in late July, a move that doomed the bill in the Senate. ) But as Rahimzadehs shrugging response indicates, the issue may no longer hold the power it once did to provoke heated passions among most business owners or even many low-income workers. I dont see the minimum wage as something that can drive a Democratic message or become a political flash point, says Amy Walter, an analyst for the Cook Political Report, who closely follows congressional races. To be sure, the half-million Americans who earn the minimum would welcome a raise. And the major small- business lobbying groups have rallied against further increases. Employers of entry-level workers in businesses such as restaurants, landscaping firms, and retail shops, especially outside the major cities, are the most adamant opponents. But since that last minimum-wage hike in 1997, inflation has pushed up most wages to the point that only 0. 3% of full-time workers are paid the minimum. One percent make less than that, either illegally or because they receive tips. ) In a poll of small-business owners released in March by Wells Fargo and the Gallup Organization, 86% of those surveyed said the minimum wage had no effect on them or their hiring practices. And even if the wage went up by 10%, some 75% said there would be no effect on their business. Only 14% of small-business owners who said they were thinking about hiring a new employee told the pollsters they would hire at the mi nimum wage. Dennis Jacobe, Gallups chief economist, who conducted the survey, says that its results could be partially explained by the growing number of states and localities that have set their minimum wages higher than the federal level. Even more important, Jacobe says, the typical small business hires fewer unskilled workers and more specialists than in years past. And in a tight labor market, businesses are finding that they need to pay higher wages, even to entry-level employees, to find good workers and retain them. Between 1997 and 2004, the most recent year for which the U. S. Bureau of Labor Statistics has figures, the average hourly wage rose 8. 3%. The minimum wage has become irrelevant to a growing majority of business owners and workers. But if a minimum-wage hike wont raise many hackles, that doesnt mean that it will be without victims specifically, those businesses that do pay the minimum to many of their workers and operate in competitive industries. We cannot raise prices, says Jack Wolcott, the owner of a bookstore in Corvallis, Ore. So we have to consider discontinuing slower-moving items to compensate [for higher ages]. It gets more difficult to justify the burden on small employers of a mandated wage hike when you consider that the Bureau of Labor Statistics estimates that fewer than 30% of minimum wage earners are considered heads of household, according to Richard Burkhauser, professor of policy analysis and management at Cornell University. The other 70%? Mostly relatively well-off part-timers, such as suburban teenagers working sum mer jobs. Boosting the minimum wage, then, would benefit many workers who arent poor, and punish many businesses owners who cant afford it. There are more targeted ways to help the working poor. Burkhauser proposes an increase in the earned income tax credit, which would essentially rebate some of the 15. 3% federal payroll tax that is paid even by workers too poor to owe income taxes. Stuart Butler, vice president for domestic and economic policy at the conservative Heritage Foundation, suggests giving further tax incentives to the working poor, including offering refundable health-care tax credits and repealing the federal unemployment tax. Why havent these options gotten as much attention from lawmakers as has the minimum wage? Just a guess, but maybe its because they dont offer as many juicy election-year opportunities to pit workers and employers against each other. http://money. cnn. com/2006/08/18/magazines/fsb/whos_afraid_minimumwage. fsb/index. htm? postversion=2006082109 other minimum wage articles: http://money. cnn. com/2006/11/08/news/economy/minimum_wage/index. htm? postversion=2006110915 http://money. cnn. com/2006/08/18/magazines/fsb/whos_afraid_minimumwage. fsb/index. htm? postversion=2006082109 Chapter 3w – Applications and Extensions of Supply and Demand Analysis Note – this chapter was later added by the authors. This chapter is available for download the following link: http://highered. mcgraw-hill. com/sites/0072819359/student_view0/web_chapter3/origin_of_the_idea. html Figure 3w. 1 – Example- Change In Supply: Market for Lettuce After Crop Freeze Results In Decreased Supply Original supply curve for lettuce is S1, original demand curve for lettuce is D1, original price is P1, original quantity supplied is Q1 a weather freeze occurs .. smaller quantity of lettuce produced .. shift of the supply curve to S2 weather does not affect demand for lettuce, so demand curve remains D1.. rice becomes P2 and quantity supplied becomes Q2 This is an example of change in supply (shift to a new supply curve), and change in quantity demanded (movement along an existing demand curve) Figure 3w. 2 – Example- Change In Demand: Market For American Flag Sales After National Tragedy Results In Increased Demand Original supply curve for American flags is S1 original demand curve for American flags i s D1 original price is P1, original quantity supplied is Q1 The 9/11 terrorist attacks result in larger quantity of American flags demanded, shifting the demand curve to D2 The attack does not enable suppliers to make more flags and potential new suppliers know the demand will soon return to normal so new suppliers do not enter the market Result is price becomes P2 and quantity supplied becomes Q2 This is an example of change in demand (shift to a new demand curve) and change in quantity supplied (movement along an existing supply curve) Note that raised prices are not from â€Å"price gouging,† but rather from the normal workings of the economy if the government did not allow temporary higher prices for flags the suppliers would refuse to supply more than Q1 ecause they would be selling at a loss, e. g. paying workers overtime but not able to include overtime costs in selling price If the government did not allow temporary higher prices for flags the resulting shortage of Q2-Q1 would bid up prices of flags already available to a price well above P2 a black market for flags would arise profits going to black marketers rather than legal producers/ suppliers government tax collections are also hurt because black marketers do not collect sales taxes This government interference would create great profits for criminal black markets.. hese criminals would have plenty of money to bribe police/ government officials to look the other way and to keep the price restrictions in place Figure 3w. 3 – Example- Change In Both Supply and Demand: The Market For Pink Salmon After Change In Technology and Change In Consumer Tastes Results In Increased supply and Decreased Demand Original supply curve for pink salmon is S1 original demand curve is D1 original price is P1 original quantity supplied is Q1 Improved fishing technology including larger and better-equipped boats .. increased supply of pink salmon, shifting the supply curve right to S2 .. uantity supplied becomes Q2 and price becomes P2 But then consumer tastes change away from lower quality pink salmon to higher quality Chinook salmon .. shift of demand curve for pink salmon l eft to D2 .. quantity of pink salmon supplied becomes Q3 and price becomes P3 this is an example of change in supply = shift to a new supply curve and change in demand = shift to a new demand curve Figure 3w. 4 – Example- Change In Both Supply and Demand: The Market For Gasoline Decreased Supply and Increased Demand Original supply curve for gasoline is S1 original demand curve is D1 original price is $1. 00 riginal quantity supplied is Q1 Supply interruptions such as resulting from damage caused by hurricanes .. reduced supply shift of supply curve left to S2 quantity supplied becomes Q2 and price becomes $1. 50 Then, more use of SUV’s in the U. S and more people starting to use autos in China .. increase of consumer demand for gasoline .. demand curve shifts right to D2 .. quantity supplied becomes Q3 and price becomes $3. 00 Oil companies are large by nature so in the above model even if their net profit margin is and remains a normal 6% during move from D1 to D2 (p rice move from $1 to $3) heir total amount of profits will increase and it will seem to many that oil companies are unfairly benefiting from the higher prices created in the marketplace Note that along supply curve S2 the gasoline supplied at quantity/price Q3/$3 is more costly for the producers than Q1/$1 remember, price = cost, since cost includes a normal profit As always, the assumption is: no illegal artificial monopolistic shortages have been created by companies or governments there is free, open, transparent competition between suppliers Note, it is always in the best interest of an individual supplier to have a gain economic profits nd the way to maximize economic profits is to establish a monopoly it is always in the best interest of the economy as a whole and for consumers to have free markets so, a vital role of government is to enforce and assure free markets Legal ways for individual suppliers of goods to gain economic profits include differentiate their products from those of other companies obtain patents, copyrights, and trademarks Normal profit and economic profit will be discussed in the next chapter 4 Figure 3w. 5 – Example- Change In Both Supply and Demand: The Market For Sushi Results In Increased Demand And increased Supply Original supply curve for sushi is S1 original demand curve is D1 original price is P1 original quantity supplied is Q1 Then changing tastes .. increase of demand for sushi shifting demand curve right to D2 quantity supplied becomes Q2 and price becomes P2 Then more sushi restaurants open .. shifting supply curve right to S2 quantity supplied becomes Q3 and price returns to P1 Note that it is easy for new producers to enter the sushi market low capital investment required to open a restaurant than for new producers to enter the gasoline supply market high capital investment required Preset Prices Examples As discussed previously: a) when prices are fixed below market prices – producer shortages result b) when prices are fixed above market prices – producer surpluses result These cases mostly occur when government gets involved in pricing decisions but also can occur in the free market, as the two following examples show Figure 3w. 6 – Example: Market for Olympics Women’s Figure Skating Finals Tickets, Price Fixed Below Market Price Ticket price fixed in advance at $75, based on predicted D demand curve This arena seats 20,000 people which is the fixed quantity supplied indicated by vertical supply line S o matter what quantity is demanded the supplied amount of seats cannot change However, unexpectedly a low-ranked skater from the host country is near the top going into the finals resulting in shift right of demand curve for seats to D1 What are the results from the change in demand? they could have filled a (unavailable) 37,000 seat arena at price $75, or they could have charged $180 per seat and still filled the existing 20,000 seat arena However, since arena size nor ticket price can be changed a shortage of 17,000 tickets results, and under-pricing of tickets by $105 This results in a market for â€Å"ticket scalping† ome people who have bought tickets on the â€Å"primary market† for $75 sell them on the street â€Å"secondary market† for $180 Secondary markets may be illegal â€Å"black markets† such as when local laws prohibit ticket scalping or legal- such as trade of collectables, or stocks in the stock market Note that in some cases ticket prices are purposely under-priced, for example superstar rock bands may sell tickets for their performances at lower than market price to create buying frenzies and long lines in an attempt to create an image of super-popularity and good-will â€Å"concern for our fans† but the result? ticket scalpers make the profits that should go to the rock bands Figure 3w. 7 – Example Market For Olympics Curling Finals Tickets Price Fixed Above Market Price Ticket price fixed in advance is $75, based on predicted D demand curve This arena seats 10,000 people which is the fixed quantity supplied indicated by vertical supply line S no matter what quantity is demanded the supplied amount of seats cannot change However, unexpectedly a high-ranked curling team from the host country has lost and will not be in the finals resulting in shift left of demand curve for seats to D1 What are the results from the change in demand? they could fill a 3,000 seat arena at price $75 but, since 10,000 seats are available, demanded price for tickets has fallen to $25 What are the results from the change in demand from D to D1? they would have to lower ticket price to $25 to fill this 10,000 seat arena, but at ticket price $75 only 3,000 people plan to show up Since arena size nor ticket price can be changed a surplus of 7,000 tickets results Would the Olympics have been better off if they had charged $25 from the beginning? – yes $25 x 10,000 attendance = $250,000 but $75 x 3,000 attendance = $225,000 In these situations in many instances ticket prices are reduced for example performance-day half-price tickets for theatre plays sold at kiosks in New York City Situation of nonpriced goods â€Å"problem of the commons,† e. g. , historical plight of the buffalo goods that are owned in common by society and available for no-cost, unrestricted taking One example is the buffalo of the American western plains at one time there were hundreds of thousands of buffalo but then were nearly wiped out by â€Å"white† hunters and now just a relative few remain In the 1800s buffalo were a nonpriced good owned in common by everyone nd could be freely taken Figure 3w. 8a – Example- Nonpriced Good – Buffalo Before Arrival of White Hunters Supply curve S is vertical representing the stable, renewable, sustainable population of buffalo on the plains before the white hunters came The supply of buffalo in nature (as opposed to raised on farms) is independent of any price on buffalo In actuality, there is no price on buffalo nor on any nonpriced goods the hunters did not have to pay anything for the taking of buffalo, the price was zero The demand curve D above shows the weak demand for buffalo before the hunters came nly a relative few, Q1, were taken by Native Americans Since here there is only one real price, zero the demand curve is hypothetical- what the curve might be if there was a price In figure 3W. 8a we really only have to look at Q1 and Q2 along the bottom zero price line what does it show? there was small demand for buffalo compared to the quantity available (supplied) resulting in a large surplus (Q2-Q1) of buffalo on the plains Q2 could have been taken without affecting the Q2 supply of buffalo Because of the surplus Q1 was taken by Native Americans rather than Q2 nd the supply curve S was moving to the right over the years meaning there became a population of millions of buffalo on the plains Figure 3w. 8b – Example- Nonpriced Goo d – Buffalo After Arrival of White Hunters Then the railroad came west and with it white hunters who shot buffalo for food, hides, and for the sport of it As shown in figure 3w. 8b, the increased demand shifted the demand curve for buffalo to the right again we only have to look at Q3 and Q1 along the bottom zero price line and we can see the surplus became a shortage The sustainable supply of buffalo decreased and the supply curve S shifted left n this example to Q3 but eventually to near zero quantity In the end zero price, excess demand, and declining supply meant near extinction of the buffalo Nonpriced goods such as fish tend to get over-consumed and exhausted lacking governmental controls Nonpriced goods is one case where government intervention in the marketplace is justified using bans or number limits on taking certain species, set seasons, and costly licenses all of which reduce demand and stabilize supply In the ideal situation demand is adjusted by these governmen t controls o the demand curve intersects the supply curve at an optimum supply quantity In above figure 3w. 8b , because of government intervention the demand curve D would be moved to the left so it intersects the desired S supply curve and supply stabilizes at desired quantity Q3 along the bottom zero price line note that the zero price line would become $50 or whatever the hunting license fee was Today hunting buffalo is outlawed on public lands and their population has stabilized at about 350,000 Consumer and Producer Surplus Everyone has bought something thinking I just bought this at $10, but I would have paid up to $15 for it† the $5 difference is consumer surplus Consumer surplus- the difference between the maximum price a consumer is willing to pay for a product and the actual price that consumer pays for that product Consumer surplus is realized on most purchases only in those cases when you buy something only after spending time agonizing over whether or not to buy it are you not getting consumer surplus You would spend hours in a supermarket if you did not get a consumer surplus for almost every item you buy everything that you do not buy . g. that expensive snack you looked at but put back on the shelf has no consumer surplus However you might want to load up on every item at the supermarket if they were all discounted 90% E. g. , you have your eye on a handbag priced at $80 but don’t buy it then it goes on sale for $70 and you buy it therefore your consumer surplus is somewhere between $0 and $10 Figure 3w. 9 – Example- Consumer Surplus – HB Handbags In figure 3w9, blue triangle consumer surplus area shows the difference between the maximum prices a certain individual consumers are willing to pay for this type HB handbag nd the lower market equilibrium price these handbags sell for in stores selling price here shown to be $80 At quantity of 10,000 handbags supplied/bought consumers are willing to pay for this HB handbag the total dollar sum of the amounts represented by the blue triangle area and brown rectangle area But because all consumers only pay the amount in the brown rectangle area it means the blue triangle represents consumer surplus What is the total market dollar amount paid in this case? brown rectangle 10,000 x $80 = $800,000 What is the total market consumer surplus in this case? blue triangle (10,000 x $80) /2 = $400,000 Table 3w. 1 – Consumer Surplus, HB Handbag Maximum Actual Price Price Willing (Equilibrium Consumer Person To Pay for HB Price) Surplus Julia $130 $80 = $50 Angelina $120 $80 = $40 Kate $110 $80 = $30 Jennifer $100 $80 = $20 Betty $90 $80 = $10 Heather $80 $80 = $0 Table 3w. 1 shows the resulting consumer surplus for six of the consumers in this HB handbag market Julia values these handbags the most she may or may not be the richest of these six people and when she buys at the store price of $80 she gains a consumer surplus of $50 nd is delighted as she lea ves the store if it would have been priced $130 she still would have bought Heather values these handbags the least and when she buys at the store price of $80 she gains a consumer surplus of $0 she leaves the store wondering whether or not she should have bought the handbag if it had been priced $81 she would not have bought What of consumers who value these handbags at, say $70, point a on the demand curve? they will buy later if/when they go on sale for $70 or less In the case of a price lowered to $70, along the demand curve on figure 3w. 9 ou can approximate handbag quantity sold of about 11,000 so a lowered $70 price would result in about 1,000 more bags sold Note that the consumer surplus blue area would increase as a result of the lower $70 price Producer surplus- the difference between the minimum price a producer is willing to accept for a product and the actual price that producer receives for that product Producer surplus is realized on most sales only in those cases whe n the producer does not receive economic profit does the producer not get producer surplus Most producers would be